University of Manitoba’s Transformational Partnerships, 5 Years On

Five years ago on this date I posted an article about the University of Manitoba’s bold new venture to transfer inventions made in sponsored research without charging anything but a running royalty on actual sales. There’s all sorts of things to say about such an approach–and that’s what the article was about. On the one hand, it turns a “sponsored” research relationship into a contract research organization. That’s a standard method of operation, but it usually takes some work for a university to separate such work from the general run of open academic research to be able to provide clear title to IP.

On the other hand, receiving a running royalty only on actual product sales should get everyone at the university interested in helping a company research sponsor develop an invention so that there are indeed sales–since that’s the only way the university recovers its patenting costs, among other things.

On a yet third hand, if a company with an exclusive license (or outright ownership) doesn’t have to pay anything until there are sales, then the company might just be happy to sit on things for a while and see if it is really necessary to develop product under the licensed patent–perhaps there’s a design-around, or perhaps the market changes, or perhaps it is good to keep the invention off the market. No problem–nothing to pay until there’s product.

And on the fourth hand, negotiating a running royalty on sales can be just as complicated, if not more so, if the company owns the IP. What is the basis for the royalty, if the company owns the IP? What is the royalty base? The royalty rate? What happens if the company doesn’t pay? Can the university still demand an audit? Does the university still demand indemnification? insurance? repayment of patenting expenses? Does the university still control patent prosecution for that matter? What if the company doesn’t produce a product? What if the product is designed outside of the university invention assigned to the company? Is it is made all simple just by eliminating up-front fees? The fourth hand thinks the university’s approach is silly nonsense.

I took a look at the University of Manitoba web site to see if there was an update on the program. A university “Facts and Figures” report gives the following information:

The University’s Transformational Partnerships approach supports the success of Manitoba companies through collaborative research and development partnerships. In 2015-16 the initiative involved 28 research collaborations totaling $8.7 million in funding.

It appears, then, that the program is still in operation. In 2015-16 the university reported $158.6m in research funding, so the Transformational Partnerships accounts for a bit over 5% of total funding–pretty typical.

I checked the university’s technology transfer office web site to see if there was additional information. Not much there–links to four articles from 2013, when the Transformational Partnerships program was announced. A template research agreement at the university, last modified in 2014, anticipates that each “Party” to the agreement will own its own IP, and each has an option to exclusively license the other’s IP. Another template research agreement, last modified in 2016, pushes ownership of inventions to a Schedule C:

That sure doesn’t look like a default in which the sponsor owns and owes a royalty only on sales.

There is no template license at the university’s web site providing the details for the Transformational Partnerships program. Here’s the template patent license that is up on the university’s web site:

Plus, milestone payments on a schedule:

Plus payments for sublicenses, too. Apparently the freshness of the Transformational Partnerships program is the elimination of items a, c, d, e, f, and g. That’s nice, but the rest of the agreement might look exactly the same.

Price has never, in my experience, been the source of lengthy negotiation. The stuff that takes time is stuff that goes to corporate legal or university legal for review. Governing law, venue, audit, alternative dispute resolution, scope of license, confidentiality, rights to improvements, full disclosure of background rights, control of patent prosecution, proper accounting for legal expenses to be reimbursed, sublicensing management, penalties for late payments or underpayment–these things get negotiated.

If a company wants to close a deal quickly, it can do so quickly. Often, however, a potential licensee wants to string out a negotiation, for any number of reasons: to make sure there’s no skeletons in the closet, to see if there’s a work-around available, to deal with internal arguments to follow a different path, to deal with other rights that also must be acquired, to distract from other things of importance, to wait to see if relevant patent claims are allowed.

Desperate and impulsive potential licensees readily take an exclusive patent license with diligence obligations and fixed payments without seeing that a commercially relevant patent is going to issue, and that further research isn’t going to make that patent obsolete, or that the university is not going play a UCLA fast one and withhold information about a second invention that works as well or better than the first, and isn’t included in the deal (see the history of Xtandi).

The University of Manitoba template license template runs through a classic list of fees. Later, there will be the cost of indemnification and insurance, and dealing with infringement litigation. Of course, most of these fees could be set to $0 in a given negotiation, but it sure doesn’t look like that’s the default on offer.

The template license does not indicate whether it is exclusive or non-exclusive–there’s a blank before “License” at the appropriate point. Since section 8 of the agreement grants the licensee the right to enforce the licensed patent, it sure looks like everyone assumes the license is exclusive. Perhaps under Canadian patent law, a non-exclusive licensee has standing to sue for infringement if a contract with the patent owner says so. I don’t expect that’s the case, but Canada has its ways. Heck, the agreement requires payment calculated in U.S. dollars.

The University of Manitoba’s new Transformational Partnerships approach actively supports industry in making innovation leaps through collaborative research and development partnerships, meaning it is easier to get knowledge out of the laboratory and into the marketplace

A report called the “Manitoba Innovation Strategy” has a sidebar on the Transformational Partnerships program.

Transformational Partnerships The University of Manitoba is taking a fresh stance on handling intellectual property (IP) created in collaborative research efforts. The university now allows companies to manage and control any arising IP. This will enable companies to move products to market more quickly.

It’s not clear how owning IP rather than licensing it moves products to market more quickly. But anyhow, it sounds good. More:

“The goal of Transformational Partnerships is to encourage and stimulate the creation of new products and services by connecting the university’s considerable research expertise with commercial development and innovation in local companies,” said Digvir Jayas, Vice-President (Research and International) at the University of Manitoba. “The net result will be an increase in business productivity and overall research enterprise in the province.”

Here we have the metrics: an increase in business productivity and overall research enterprise in the province. It’s just that the university doesn’t apparently report on the program’s progress using these metrics.

The new model appreciates the need for a more flexible and nimble response to industry and will include new agreements and processes to meet those needs.

It’s just that I can’t find any new agreements that the university has seen fit to publish on its web site. The program implements a half-version of a contract research operation. The only unconventional thing is that it insists on charging a royalty rather than simply setting a price at commercial rates so as not to compete unfairly with private CRO operations.

The Transformational Partnerships initiative includes a new portal for industry to connect with partnership experts at www.umanitoba.ca/partnerships.

In the past, this was a phone number, often with a person’s name attached.

According to the sidebar, technology transfer staff will be out visiting regional companies and university laboratories, looking to match companies with research opportunities. A report on how that went would be great to see.

The University’s research plan for 2015-2020 has this to say:

I guess the Transformational Partnerships come under (d) “knowledge dissemination and translation.”

In a 2015-16 research planning document, the program is listed in a box that has to do with getting funding for administrative support.

Does this mean there wasn’t any funding for the program?

The 2017 New Faculty Orientation at the ORS web site doesn’t mention the Transformational Partnerships program, or even industry sponsored research, as far as I can see. One would think that such a program would be worth a mention, if only to make it clear that by participating, one gives up ownership of research discoveries to the company sponsor–something one ought to be mindful about, especially in a university setting, and especially if involving student work.

Except, there’s nothing in the university’s template research agreement that indicates that the “private-sector” partner gets outright ownership without negotiation. Ah, it’s “lengthy” negotiations that are to be avoided, as if the length of a negotiation is the key indicator of success. As for simplifying royalty payments, again, it’s rather nonsensical. It is easy enough to cut a check each year for a set amount. That, actually, is simple. Calculating a royalty based on sales (adjusted gross sales, net sales, net receipts, uh, whatever) is actually the difficult part. What about returns? What about discounts? What about different product configurations, some of which use licensed assets and some that don’t? When the royalty payment starts–that’s easy, really. There’s nothing to simplify here. But the university insists something is simplified, and simplicity of payment, like a short negotiation, is a hallmark of success.

In all, the university appears not to make a particularly big deal out of the Transformational Partnerships program. Perhaps that’s because there is little that’s really transformational. Negotiations are displaced from licensing to royalties; payments are delayed until/if there’s ever a product. Background rights re-open the whole lengthy negotiation issue. Despite all this, perhaps the program is working great. If so, then we ought to see some metrics relating to the effect of the program on the things the university has put forward as the purpose of the program:

Have IP negotiations been shortened?

Have companies moved inventions to product more quickly?

Has there been an increase in business productivity in Manitoba attributable to the program?

Has anyone developed a commercial product? Paid royalties on sales?

It’s nice that there were 28 research projects operating under the Transformational Partnership program in 2015-16. That’s something. And that the university received $8.7m in funding is something, too. But neither of these metrics is what the university has told us the program is meant to address. It would be great to have a better idea of what actually has come about as a result of this program.

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Here’s the thing. It’s all fine to separate out research projects that operate as contract research–research on behalf of companies, with companies owning all the results. For that to work, however, the university cannot be holding out on background rights, cannot allow free interaction of contract research personnel with anyone else, cannot introduce into the contract research anything that the company cannot have ready access to without strange requirements (so, no GPL code, say, unless the company agrees). And that’s the start.

Then there’s the matter of a royalty on sales of anything covered by IP assigned to the company. That’s a burden there. Is the value of working with the university worth paying a royalty on any product developed? Heck, the company might be working on 90% of the product on its own and want help with just 10% of the work. What’s the royalty, then? Still 5%? Or is it 0.5%? Really, to make the contract research operation work, skip the royalty on assigned IP and manage the research as a single-price contract (with no break out for administrative overhead and the like). Company pays, gets the IP, and walks away with no further obligations. That’s attractive. Not pulling a ball and chain royalty obligation with audit provisions, reporting, and the like.

We might suggest that another approach might involve a royalty-free non-exclusive license, with no change in grant overhead charges. The sponsor just gets free access and owes nothing more. In fact, to drive this approach, the university should insist on equal treatment–the company sponsor negotiates the price the university will charge for any other licensee of the IP. If the company sponsor pays $1,000, then the university will charge all others $1,000. If the company takes a free license, then the university offers that same free license to everyone else. In this latter case, essentially, the company sponsor subsidizes the research for everyone else. A wonderful gesture, to be sure, and one enabled by the university. In other words, let the company sponsor establish the value of the intellectual property produced in the research.